The Limits of Largesse

It is generally accepted that if something cannot go on forever, it won’t. But if there are good reasons for its persistence, it can continue for a long time. Together these observations describe the fiscal situation of the U.S. government, which has been testing the world’s tolerance for its fiscal experiments (?) in the last several years. The history appears in the first chart:

Deficits have been typical. The recent exception was the 1990s when the government actually ran surpluses, but until recently the size of the deficit was moderate, and to the extent they were due to economic slowdowns deficits were accepted as countercyclical responses to economic volatility. It is the government response to the Global Financial Crisis of 2008-09 and more recently the Covid pandemic that caused deficits to reach levels only exceeded in World War II. Perhaps the most noteworthy feature of the graph is that even in the Great Depression following 1929, the deficits did not exceed 5% of GDP; in the GFC it was double that, followed not long afterward by the pandemic which was even larger.

The response in both cases was vigorous. There is little question that action was required from the federal government; the question, as always in such cases, was how much to apply. The scale of the GFC was, at the time, unprecedented, but the extent only became apparent as events unfolded. In July, 2007 Bear Stearns closed its leveraged funds in response to losses on mortgage instruments, followed by similar problems at French bank BNP Paribas. After multiple problems at mortgage lenders the Federal Reserve began to cut interest rates, becoming more aggressive into 2008. The federal government passed the Economic Stimulus Act of 2008, which sent checks to 130 million taxpayers. Despite that stimulus, by July, 2008 Fannie Mae and Freddie Mac were headed for insolvency, which the government acted to prevent. But Lehmann Brothers did file for bankruptcy, followed shortly by the collapses of Washington Mutual, the largest thrift, and Wachovia, the fourth-largest bank. Both were sold for nominal amounts by the Federal Deposit Insurance Corporation. At that point the economy was deteriorating rapidly, to which the Bush administration responded with the Troubled Assets Relief Program (TARP) commitment of $700bn (the full amount of which was not ultimately required). When Barack Obama took office as president in early 2009 that administration introduced the American Reinvestment and Recovery Program Act (ARRA). The combined Bush and Obama programs were the fiscal response of 2008-09 shown in the chart above.

Unprecedented as that was, it paled compared to the federal response to COVID-19. That response was extraordinary. Alan Blinder captured the period in his economic history of the last several decades:

The spread was frighteningly rapid. By May 1, 2020, the cumulative number of confirmed cases in the United States was about 1.12 million, and over 68,000 people had died. By the end of 2021, they were a staggering 56 million cases and over 800,00 deaths—and rising. Worldwide numbers were, of course, multiples of U.S. numbers.

The pandemic was in the first instance, a public health catastrophe of the first rank, the worst since the badly misnamed Spanish flu pandemic of 1918-1920. But it also brought on an economic catastrophe with blinding speed. The recession of 2020 was the deepest contraction the United States had witnessed since the 1930s, dwarfing the Great Recession of 2007-2009 and by far the sharpest recession ever. For comparison, the peak-to-trough decline in real GDP over the six quarters from 2007:4 to 2009:2 was 4 percent, while the decline in 2020 was 10.1 percent, almost all of which occurred in a single frightening quarter: 2020:2. Real GDP in that dreadful quarter palindromic quarter declined at a mind-numbing 31.2 percent annual rate, cutting this comprehensive measure of economic activity all the way back to its 2015:1 level. The unemployment rate soared to almost 15 percent (Note 1).

The urgency of the moment was expressed in the response. The Coronavirus Aid, Relief and Economic Security (CARES) Act was passed in March, 2020 and in total authorized spending of $2.2 trillion. Then-President Donald Trump signed it the same month, and it was the largest spending bill in history. One year later President Joe Biden’s American Rescue Plan had a price tag of $1.9 trillion. The federal debt load incurred in the GFC had not been reduced in the meantime and raised the debt level yet further:

President Biden’s spending plans were, in fact, not finished, but opposition in Congress was such that his additional plans ultimately were not passed.


It is worth inquiring into how this all ends.

That is not knowable at this point, obviously, but some calculations can help. The Congressional Budget Office publishes periodic forecasts of the federal debt. The update that they published in June of this year included their forecast of the federal debt out to the year 2053:

The astonishing feature of this chart is that the combination of the GFC and the pandemic returned the federal debt to the same level as WWII, but rather than reverting to less extreme levels, it just keeps rising.

If that were not alarming enough, the optimism in certain of the important assumptions certainly is. The most dubious among them is buried in the copious supporting tables. The CBO includes their forecast of the change in real GDP by year for the period ending in 2053. The forecast is for an acceleration of growth to 2.7% in 2025, reverting gradually thereafter to continuous economic growth of 1.5% per year. Over 30 years’ time there is no recession included in the forecast.

That is not the only debatable assumption. CBO assumes that interest rates paid on the debt remain well behaved. Specifically, they forecast that the composite rate paid on debt held by the public over the 2023-2053 period will be 3.4%, less than the 4% paid over the previous 30 years. But that is not the entire history. The data for 10-year Treasury bonds over the period from the inception of the series used by the Federal Reserve Bank of St. Louis in Chart 4 shows the CBO forecasts in historical context, which ignore the inconvenient period that preceded their series:

Fitch Ratings, one of the principal credit rating agencies, recently downgraded the U.S. from AAA. That followed a similar decision a decade ago by Standard and Poor’s, leaving Moody’s as the only agency with the highest rating. Treasury Secretary Janet Yellen dismissed the downgrade as based on “outdated data”, which is a bit humorous when the putatively nonpartisan CBO’s view is so optimistic. What is sorely needed is spending discipline, but the responses to the GFC and Covid pandemic are not encouraging.

The most worrisome is that the U.S. risks losing a battle with an implacable foe—the rule of compound interest. If one continually borrows to pay bills, the debt load grows year by year, and with it the interest burden. As the debtor borrows more to pay interest the debt mountain grows ever larger. In the corporate world there are companies that do this, and they are known as “zombies”, and typically follow the road to bankruptcy. In the case of a borrower with the credentials of the U.S. that is highly unlikely. What is not is a narrowing range of fiscal choices, as responses to future shocks may be constrained by the debt load. The other result may be a weaker currency over time. Complacency at the path of federal finances is increasingly at variance with reality. The value of the dollar is the world’s voting machine, and it is unlikely that they will pull the same lever indefinitely. That in turn is likely to mean higher inflation.


  1. Blinder, p. 233.



Blinder, Alan S. 2022. A Monetary and Fiscal History of the United States. Princeton, NJ. Princeton University Press.

CBO (Congressional Budget Office). 2023. An Update to the Budget Outlook: 2023 to 2033. CBO Report 59096, May 2023. Washington, D.C.

CBO (Congressional Budget Office). 2023. The 2023 Long-Term Budget Outlook. CBO Report 59014, June 2023. Washington, D.C.

John R. Gilbert

John is a Senior Research Consultant whose primary responsibilities include contributing differentiated macroeconomic perspectives as well as providing industry and company research.

In addition, he writes investment commentary, which is published on our website.

John has worked in the investment industry for over 45 years. He was formerly our Director of Research. Prior to joining BFS, he was the Chief Investment Officer at New England Asset Management, Inc.

John has achieved the designations of Chartered Financial Analyst® and Certified Public Accountant.


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